Lifetime Annuity
Overview
An annuity is simply a series of payments made at selected
intervals in return for a pension fund. The level of payment
is dependent upon age, sex, annuity rate, size of fund and
options selected. Annuity rates tend to mirror interest
rates since they are related to the returns earned on Fixed
Interest Gilt Edge Securities. There are many different
types of Annuities and these are covered later on in this
section.
Tax Free Cash
Most types of pension plan have the option of taking a
tax-free cash lump sum before exchanging the residual fund
for a series of payments. Once an annuity has been purchased
there is no further entitlement to tax-free cash, therefore
the decision of whether to access the cash or not needs to
be made at outset.
Income
Annuity payments are taxed at source under the PAYE system.
Provided a P45 is presented the annuity will be paid net of
your marginal rate of tax and there will be no further tax
liability. Payments can be made monthly, quarterly, half
yearly or yearly and can be in advance or arrears. Payments
can remain level or can increase at a set rate or in line
with an index e.g. Retail Prices Index.
Death Benefits
The option of what type of death benefits to include must be
made at outset. The options available are as follows:-
● A spouse’s or dependents pension up to 100% of the pension you had
received
● A guaranteed period of up to 10 years which will ensure that on death
within the first 10 years, the remaining payments you would
have received continue to be paid to your estate.
● Commonly known as Value Protection, this option can be included to ensure
that on death (before age 75), the original fund value, less
the gross income payments already made, can be paid out less
a flat rate tax charge of 35%. This is offered at the behest
of the provider.
Advantages
● You will receive a guaranteed income for life, and you can elect for your
spouse/beneficiaries to receive a guaranteed income or a
lump sum less tax upon your death.
● Tax-free cash is available at outset.
● There are no additional charges applied to the contract once in force. All
charges are taken at outset and are reflected in the annuity
rate offered.
● The contract is simple to understand, there is no need to review the
contract and there is minimal paperwork needed to start the
payment of benefits.
Disadvantages
● The selected income level is fixed and cannot be varied in response to
changing personal financial circumstances (excluding
potential future increases).
● There is no opportunity of participating in future investment returns.
● Any options to provide benefits on death must be selected at outset and
will result in a lower initial pension payment. These
selected benefits cannot be altered in the future.
Suitability
Lifetime annuities are most likely to suit individuals who
want an absolute guarantee on their pension payments and/or
for their spouse/partner. They therefore suit individuals
with low attitudes to risk and a requirement for security.
They also suit individuals who have relatively small pension
funds and who will be heavily reliant on their pension
income.